During the first four months of 1998, non-residents increased their holdings of South African shares and equities by R35,7 billion. A total net inflow of foreign capital of R11,1 billion took place in the first quarter of this year. Throughout this period, the Reserve Bank intervened in the market for foreign exchange as a net buyer of United States dollars. The gross gold and foreign exchange reserves of the Bank increased by R4,3 billion from 31 December 1997 up to 30 April 1998.During the month of May 1998, a new upsurge in the East Asian crisis spilled over into a number of other emerging market countries. South Africa was on this occasion also affected and non-residents reduced their purchases of South African securities substantially. In the case of the Bond Exchange net outflows of non-resident funds occurred during most of the month, whereas a much smaller amount flowed in through the Johannesburg Stock Exchange. Negative expectations on the exchange rate of the rand also affected other short-term capital flows, such as inter-bank and international trade financing.These adverse developments were not caused by any fundamental deficiencies in the South African domestic economy. On the contrary, the domestic situation still justifies some relaxation of macroeconomic policies. The situation in the market for foreign exchange, however, forced a reduction of liquidity in the banking sector and exerted upward pressure on short-term interest rates. In this conflicting situation, the Reserve Bank reversed the direction of its intervention operations in the foreign exchange market and became a net seller of foreign exchange in both the spot and forward markets. The external pressures were partly absorbed in a depreciation of the exchange rate, and partly in a tightening of the domestic money market liquidity situation, with some unavoidable rises in domestic interest rates.For the purpose of its intervention in the spot foreign exchange market, the Bank made use of existing foreign credit facilities which were established in the past but not yet utilised. An additional amount of R7,9 billion was drawn on these facilities. The Bank’s total gross gold and foreign exchange reserves showed a small increase from R32,7 billion at the end of April to R32,9 billion at the end of May 1998.It remains the longer-term objective of the Reserve Bank to reduce its role in the forward foreign exchange market. The Bank indeed succeeded in reducing its oversold forward book from US$23,6 billion at the end of February 1997 to US$17,5 billion on 30 April 1998, that is, by US$6,1 billion. With the substantial increase in demand for forward cover during May, the Bank again increased its oversold forward book by US$ 3,5 billion. It should be noted that this avoided a further substantial draining of liquidity from the domestic money market.Taking account of the outstanding amount of short term foreign borrowings of the Bank, the gross amount of gold and foreign exchange reserves and the total of the forward book, the Bank’s net open foreign exchange position amounted to US$17,9 billion as at 29 May 1998.Defending the South African financial position against this latest wave of the withdrawal of foreign investment funds from emerging markets with a package that included partly financing of the foreign exchange deficit, and partly resorting to exchange and interest rate adjustments, the authorities endeavoured to provide maximum possible protection to the fragile domestic economic situation in a an adverse international financial environment. The Reserve Bank is of the opinion that this approach will restore confidence with foreign investors in our resolve to address the problem with sound macroeconomic policies. Hopefully, more calm conditions and greater stability will also be restored to the international financial markets very quickly. This will enable South Africa to proceed with its medium and longer-term objectives as far as the domestic economic situation is concerned. The Reserve Bank will then also continue to implement its policy of redu